How to Use a Secured Credit Card and Build Credit

A secured credit card could be a stepping stone toward a better credit score. You could use one to build credit or recover from damaged credit.

What Is a Secured Credit Card?

A secured credit card looks and works like any other credit card. You use it to make purchases that you pay for later. If you don’t pay off your entire balance by your payment due date, you could owe interest on the unpaid balance. The key difference is that with a secured card, you need to make a refundable cash deposit to open the account.

With traditional credit cards, the lender trusts you to pay the money you owe. It doesn’t take long to build this trust. In the meantime, if the lender isn’t sure whether you’ll pay your debt, whether because your credit score is low or you haven’t established a credit history yet, a cash deposit lowers their risk.

Secured vs. Unsecured Credit Cards

Secured and unsecured credit cards work the same way once you’re approved: you make purchases, get a monthly bill, and pay it off over time or in full. The difference is in how you qualify.

An unsecured card doesn’t require a deposit. Instead, the issuer relies on your credit history and income to decide whether to approve you and what credit limit to offer. 

A secured card requires a cash deposit instead. The deposit lowers the issuer’s risk, so applicants with low credit scores or no credit history may have an easier path to approval. The Consumer Financial Protection Bureau recommends a secured card as an option when you don’t qualify for a regular credit card.

Not every secured credit card issuer reports payment history to all three credit bureaus, so confirm this before you apply, no matter which type of card you choose. Responsible use of either type helps you build credit over time.

Secured vs. Prepaid and Debit Cards

A secured card, a prepaid card, and a debit card all require money upfront. Beyond that, they work in very different ways.

A prepaid card holds the money you load onto it. A debit card pulls money directly from your checking account. Neither is linked to a credit account, so neither one reports your activity to the credit bureaus or helps you build credit.

A secured card works differently. Your deposit backs a real line of credit, and you get a monthly bill. Because a secured card can be reported to the credit bureaus, it can work as a useful credit-building tool. 

How to Choose a Secured Credit Card

Secured credit cards come with different fees and terms, so take the time to compare options to find one that best fits your needs.

Fees you might notice include an annual or monthly fee, application fees, inactivity fees, statement fees, membership fees, and so on. Many secured card options don’t have these fees, so prioritize those when you compare cards.

You also want to be aware of the APR (annual percentage rate), which is the interest rate you’re charged on any balance you carry from month to month. Pay your balance in full each month to avoid interest.

To build a good credit score, apply for a secured credit card that reports your balance and payment history to the credit bureaus—Equifax, Experian, and TransUnion, ideally all three. If your card doesn’t report, it won’t help you build credit.

Get Started With a Secured Credit Card

You can apply for a secured credit card online with most issuers. You’ll need to provide personal and financial information. Some issuers run a credit check; others don’t. Many secured cards are available to applicants with limited or poor credit.

Once you’re approved, here’s what comes next.

Make your security deposit

After approval, your card issuer explains how to make your security deposit. Most issuers allow you to link your bank account to complete the deposit online. Some may also accept mailed money orders or other forms of payment. Deposit amounts vary by issuer. This amount typically equals your credit limit. Some secured cards allow a higher limit than your deposit.

Pay on time and in full

Responsible payment habits build credit. Aim to pay on time every month. Each bill shows the minimum amount due. Pay your balance in full when you are able, because it saves you interest charges and helps your credit score.

Your payment history is the biggest factor in your credit score. Consistent, on-time payments could help build a solid credit profile.

Use your card sparingly

A secured card gives you more freedom to make purchases. Spend within your means, and avoid purchases you can’t pay off each month. This could help you avoid unnecessary debt and keep your credit utilization low.

Credit utilization is the share of your credit limit you carry as a balance. Generally, the lower your utilization, the better it is for your credit score. 

Monitor your credit progress

Regularly check your credit report to track your progress and confirm your issuer reports your activity to the major credit bureaus. Regular checks help you stay motivated and may highlight errors or areas for improvement.

These steps could put you on your way to a healthier credit score. That could eventually qualify you for an unsecured credit card.

How to Use a Secured Credit Card and Build Credit

A secured credit card may help you build or rebuild your credit over time. The key is to practice good habits that show lenders you can manage credit responsibly.

Start with small, manageable purchases and things you already buy regularly, like a monthly subscription or an essential expense. That way, you don’t add to your regular spending.

Note the due date for each bill, and make your payments promptly. Aim to pay off your balance in full each month to avoid interest charges. This habit saves you money and can help you establish a positive payment history. Payment history is the biggest factor in your credit score.

On-time payments and a low balance should gradually improve your credit. Over time, this responsible behavior may help you apply for an unsecured credit card and open up more financial opportunities.

When Do You Graduate From Your Secured Card?

After a period of use and on-time payments, some banks may convert your account to an unsecured credit card automatically and return your deposit. If your credit card issuer doesn’t do this, you may be able to apply for an unsecured card after six to 12 months of on-time payments.

At that time, consider a starter card. Starter cards typically have easier approval requirements. Capital One and Discover are known for traditional (unsecured) credit cards that are designed for students and others with limited credit history. Once you get an unsecured card, you may close your secured credit card account and request the return of your deposit. You’ll need to pay off any outstanding balance first.

Pros and Cons of Secured Credit Cards

A secured credit card could be a great option if you want to get your credit score on the right track and establish a good credit history. It offers real benefits, including:

• An effective way to build or rebuild your credit history and credit score, including after debt settlement

• Almost anyone could apply for a secured card

• With on-time payments, you could graduate to an unsecured card in a matter of months

Secured credit cards have some downsides too:

• You’ll need to put down a security deposit

• Some secured cards have fees

• Secured cards tend to have low credit limits